German Corporate Governance Code Amended to Increase Focus on Executive Compensation
The German Corporate Governance Code has been amended to place more focus on long-term oriented compensation and enhance the power of the supervisory board over the setting of executive compensation. Under the amended Code, the full supervisory board must determine the total compensation of the individual management board members and regularly review their compensation scheme. Management compensation must be an appropriate amount based on a performance assessment, taking into consideration any payments by group companies.
Criteria for determining the appropriateness of compensation are both the tasks of the individual member of the management board, their personal performance, the economic situation, the performance and outlook of the enterprise, as well as the common level of the compensation taking into account peer companies and the compensation structure in place in other areas of the company. If the supervisory board calls upon an external compensation expert to evaluate the appropriateness of the compensation, care must be exercised to ensure that the expert is independent of both the management board and the company.
More broadly, the Code now provides that the compensation structure must be oriented toward sustainable growth of the enterprise. All compensation components must be appropriate, both individually and in total, and in particular must not encourage the taking of unreasonable risks.
The supervisory board must also make sure that the variable compensation elements, such as bonuses, are based on a multi-year assessment. Both positive and negative developments must be taken into account when determining variable compensation components.
For instance, share-based compensation elements, such as stock awards and options, must be related to demanding comparison parameters. Changing such performance targets or the comparison parameters retroactively must be excluded from the compensation scheme. For extraordinary developments, a cap on compensation can be imposed by the full supervisory board.
The Code mandates the disclosure of the total compensation, by name, of each one of the members of the management board, divided into fixed and variable compensation components. Similarly, there must be disclosure of any golden parachutes available to board members. Disclosure may be dispensed with if a general meeting of shareholders passes a resolution to this effect by three-quarters majority.
In order to increase transpatency, the Code requires both the management and supervisory boards to report each year on the company’s corporate governance in the annual report, including an explanation of possible deviations from the Code. The company must keep previous declarations of conformity with the Code available for viewing on its website for five years.
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